The commodity futures market is different for crops and livestock than it is for durable commodities such as gold. Commodities trading in each can be profitable but it is important for commodities traders to understand the differences in supply and demand for these two types of commodities. Here we look at crops and livestock.

Commodity supply can be influenced by a large number of factors. Supply factors are different for trading agricultural commodities as opposed to the commodity market in precious metals, for example. Food can be stored dry or refrigerated but eventually needs to be consumed. Food is, in fact, produced to be eaten. Therefore the supply of crops and livestock needs to be replenished every growing season. This makes food commodities susceptible to short term factors such as the weather in different parts of the globe. It also makes food supply dependent upon adequate storage as well as transportation from producing areas to the consumer. Fundamental commodity analysis of these factors will improve the chances of success in trading commodities.

The amount of crops planted, the amount not consumed last year, crop disease, weather, anything that stops food from arriving at the table, and technology. Low supply leads to higher commodity prices and higher prices lead to more production and higher supply. Higher supply leads to lower prices and reduced production and then the cycle repeats itself. Commodity investing will be more successful if the trader understands the factors that increase and decrease food production and availability of the commodity. The so called Green Revolution that increased crop yields not only fed millions more but it helped keep each grain commodity price within reasonable limits. An understanding of genetic engineering and crop yields is an excellent example of fundamental commodity analysis.

Fundamental commodity analysis starts with supply but supply is inextricably tied to demand. Absolutely sufficient supply related to demand would mean that commodity prices would stay absolutely fixed, year after year. Commodity trading charts would just show a flat line extending into the future. Commodity trading software would not be needed and, in fact, food would not be a trading commodity. With a growing world population and more affluent societies in Asia demanding more protein rich food the demand for livestock has gone up and grains are diverted into cattle feed instead of being sent to the table. Understanding the changing dietary patterns of much of the developing world is part of fundamental commodity analysis. Good commodities tips may have as much to do with what Chinese teenagers want to eat as with how much land is planted in Argentina, Brazil, the United States, Canada, and the Ukraine.

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